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VAT on Voluntary Carbon Credits: A Policy Shift from HMRC

VAT on Voluntary Carbon Credits: A Policy Shift from HMRC

London, 29th May 2024

 

VAT on Voluntary Carbon Credits: A Policy Shift from HMRC

On the 9th May 2024, HMRC published a Revenue & Customs Brief announcing a change in the VAT treatment of Voluntary Carbon Credits (‘VCC’). The relevant section of the VAT Manuals has also been updated.

What Are Voluntary Carbon Credits? 

According to HMRC, a VCC is:

A tradable instrument issued by an independently verified carbon-crediting program. It represents a reduction or removal of one metric tonne of carbon dioxide, or an equivalent amount of greenhouse gases (GHGs) from the atmosphere, measured by reference to a baseline scenario. Voluntary carbon credits are any carbon credits that are not compliance market credits.

 

Key Changes Effective from 1st September 2024

VAT will now be applied to certain trades of VCCs at the standard rate in the UK. Prior to this policy shift, trading VCCs was outside the scope of VAT in the UK and did not require VAT accounting.

 

Exceptions to the New VAT Rules

Some transactions involving VCCs will remain outside the scope of VAT:

  • The first issuance of a VCC by a public authority
  • The holding of VCCs as an investment, where there is no economic activity
  • Donations made to VCC projects
  • Sales of VCCs from self-assessed projects with no independent or third-party verification

VCCs have now been brought within the scope of the Terminal Markets Order, meaning any VCCs traded on a qualifying terminal market can be zero rated for VAT purposes.

Despite these exceptions, the vast majority of active participants in the UK’s Voluntary Carbon Market (VCM) will be affected by this policy change, as will any parties planning to enter the market soon.

 

Implications of the Policy Shift on the VCM

In some ways, this policy shift signals a recognition of the VCM’s maturity as it continues to evolve. Previously HMRC did not observe VCCs being incorporated into onward supplies by businesses purchasing them and there was no evidence of the existence of a significant secondary market. In publishing this policy paper, HMRC has acknowledged that there have been significant changes in the VCM, including the emergence of secondary market trading and businesses incorporating VCCs into their onward supplies. This evolution is encouraging for proponents who see the VCM as critical in addressing climate change.

For some existing market participants, such as project developers, this change presents an opportunity to recover input VAT, positively impacting their cost base. However, businesses with exempt or partially exempt supplies may face negative impacts if they cannot recover the VAT, thereby increasing their costs.

 

Challenges and Considerations

Aside from potential negative financial impacts around VAT recoverability, the change introduces greater complexity and compliance costs to a nascent market that arguably needs more support and nurturing rather than additional red tape. Additionally, this move may put the UK at a competitive disadvantage, as other jurisdictions remain indirect tax-free for VCCs. This is a concern for an emerging financial market in need of new infrastructure and one where the UK may have taken a leading role.

Carbonplace’s CEO, Scott Eaton, has shared his perspectives on this matter here, highlighting the supportive measures needed for corporate sustainability efforts.

 

Media Contact 

Scott Eaton, Chief Executive Officer at Carbonplace

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